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News highlights for January 2014

A converged financial reporting standard for revenue recognition
moved closer to reality with an indication that FASB would vote in
favor of a standard—and some late changes.

FASB directed its staff to draft a final revenue recognition standard
that was expected to be submitted to the board in December for final
approval. FASB members indicated by a 5–1 margin that they would vote
in favor of the standard.

The International Accounting Standards Board (IASB) also voted to
proceed with a ballot for the standard, which is expected to be issued
during the first quarter of 2014.

The revenue project has been followed closely by companies worldwide.

“This is a major accomplishment that will greatly change how people
think about perhaps the most important item in financial statements,”
FASB member Tom Linsmeier said during the board meeting.

The final standard submitted for ballot will eliminate much of the
industry- specific guidance in U.S. GAAP, and include a five-step
process for revenue recognition:

Step 1: Identify the contract with a customer.

Step 2: Identify the separate performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the separate performance
obligationsin the contract.

The boards made a significant late change to the proposal during
their last joint meeting on the project. They voted to tentatively
approve a collectibility threshold that contracts must meet for
revenue to be recognized. Entities would have to determine that
collectibility is probable in order to recognize revenue.

This threshold would introduce slight divergence into the standard,
because “probable” means “more likely than not” under IFRS, but means
“likely to occur” under U.S. GAAP, as defined in FASB Accounting
Standards Codification Topic 450, Contingencies.

“We’re not really coming together, are we, because we’re saying the
same word, but we’re meaning something different, which concerns me,”
IASB member Stephen Cooper said during the joint meeting.

According to the previous tentative decisions, the proposed standard
would take effect for reporting periods beginning after Dec. 15, 2016
(FASB), or reporting periods beginning on or after Jan. 1, 2017 (IASB).

FASB and the IASB also made tentative decisions on the objective of
the constraint on estimates of variable consideration. The boards
voted to:

Require an entity to include an estimate of variable consideration
in the transaction price to the extent that it is probable (U.S.
GAAP) or highly probable (IFRS) that a significant revenue reversal
will not occur. A significant revenue reversal will occur if there
is a significant downward adjustment on the amount of cumulative
revenue recognized from that contract with that customer.

Require an entity to update the estimated transaction price at
each reporting date.

Create an exception to the constraint guidance when an entity
licenses intellectual property in which the consideration is in the
form of a sales or usage-based royalty. In these cases, the entity
shall include that consideration in the transaction price only when
the subsequent sales or usage occurs.

The boards also voted to clarify the criteria for
differentiating between licenses that provide a customer with access
to the entity’s intellectual property as it exists at any given time,
and licenses that provide a customer with a right to use the entity’s
intellectual property at a point in time.

As the boards worked on late-stage changes, PCAOB member Jay Hanson
said in a speech that auditing revenue will need to be an area of
focus for PCAOB standard setting in the near future.

“It is my hope that the PCAOB will soon devote substantial resources
to an audit standard project in this area, and that we will be able to
issue a proposal on auditing revenue with sufficient lead time to
allow new accounting and auditing standards to become effective at or
around the same time,” Hanson said at the Brigham Young University
Accountancy Alumni Conference in Provo, Utah.

Auditing revenue is not yet on the PCAOB’s standard-setting agenda.
But Hanson said that in view of revenue’s significance, the PCAOB
needs to consider the issue.

Updates on the revenue recognition project and information on the
implementation of the new standard are available on the JofA
revenue recognition page.

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